The G20 Battens Down the Hatches

The Cannes G20 Summit was almost blown off course by the sovereign debt crisis, which euro zone members tried, but failed, to stem in the days preceding the summit. In spite of the economic storm, the G20 managed, on a number of important files, to reaffirm and clarify directions taken and commitments made at earlier summits. Arguably, however, the summit also represents a step back from some other aspects of the G20 economic cooperation agenda, which, while more daring and difficult, could have fostered a more dynamic response to the unfolding crisis.

First, the good news. The G20 explicitly stuck with its medium-term fiscal sustainability plans, and strategies for financial markets regulatory reforms, both meant to provide more stable foundations for long-term economic growth.

Although a number of countries will be delaying their plans to reduce deficits and stabilize public debt-to-GDP ratios due to slower growth, the G20 was remarkably detailed about each country’s planned trajectory and how their individual fiscal and broad economic policy frameworks fit together in a globally coherent way. That is real progress.

The G20 also reconfirmed its plans for tougher oversight and stronger capitalization of the financial sector. These plans have raised concerns that lending could become too restricted at a time when supporting economic growth requires more, not less, willingness to lend. However, the appointment of Mark Carney, governor of the Bank of Canada as head of the Financial Stability Board (FSB), as well as the strengthening of the FSB’s capabilities announced in Cannes, underscore the G20’s determination to move ahead. While the Bank of Canada has acknowledged that reform can have a dampening impact on lending in the short term, its findings support the view that a better capitalized and more stable global financial system will have a large ongoing and positive global impact on standards of living.[1]

The bad news, for many, will be that this fiscal and financial stability agenda, plus a list of measures and trends already under way in each country, constitute the bulk of the “Action Plan for Growth and Jobs” unveiled at the summit. Although these moves, including an apparent openness to greater exchange rate flexibility on the part of China, support growth prospects down the road, there was, in fact, no measure announced in Cannes that comes close to directly addressing the enormous unemployment and social stresses generated by the crisis.

Thus, the grand statement in paragraph 3. of the Cannes communiqué that “...we have taken decisions to...reinvigorate economic growth...create jobs...promote social inclusion and make globalization serve the needs of the people” is, to put it charitably, open to interpretation. The decisions, essentially, boil down to the aforementioned measures to stabilize the medium-term macroeconomic and financial outlook, a more concerted push against fiscal evasion, steps to give national authorities greater ability to supervise commodities markets, and a rather open-ended promise of monetary backstopping for banks and resources for the International Monetary Fund (IMF), should things go from bad to worse. While this constitutes an impressive range of topics, steps actually taken are a meager consolation for the tens of millions of people either thrown out of work or into more precarious work by the crisis.

On balance, the communiqué is otherwise relatively sober. The G20 seems to understand that it can quickly run into credibility issues by over-promising — or wading into issues on which consensus would be even more elusive than on economic questions.

But even economic cooperation has, arguably, taken a back step since the 2009 Pittsburgh summit. Any ambition to mutually assess and cooperate on a wide range of economic policies — including structural economic issues pertaining to investment, social safety nets, trade and the jobs market, which are so important for long-term growth — seems to have shrunk considerably from the grand “Framework for Strong, Sustainable and Balanced Growth” unveiled in Pittsburgh.

The recent focus of G20 macroeconomic cooperation on “indicative guidelines” for a few indicators, some of which are symptoms rather than the source of harmful imbalances, suggests the cooperation glass is half empty, not half full. True, Italy would probably not have agreed to IMF monitoring without G20 insistence of such action, but the G20 was, it seems, simply caught off guard by the extent of the crisis and the apparent inability of some of its members to stem the loss of confidence in economic policy making, which has battered global economic growth since the summer. Since the 2008 crisis, the G20 as a group has developed neither the sufficient understanding of interdependencies nor the mechanisms that would have allowed it to avoid the new storm.

The ball has, therefore, mostly been thrown back into individual members’ courts, to be played in light of their economic and political possibilities and circumstances, with an admonition to take international spillovers, which the IMF will monitor better, into account.

As the Indonesian finance minister was quoted as saying, comparing the current crisis to the 1997 Asian crisis: “This time it’s really hard for everybody…advanced countries need to implement structural reforms, and it’s true that this is difficult.” His predecessor in that post said, concerning macroeconomic management: “Developing countries…have learned their lesson. Now this lesson can be applied by others.”[2]

In short, the takeaway from the Cannes summit is that there is no successful collective effort without individual effort. Where efforts of individual countries are lacking, the collective resolve is undermined. In the face of this, the leaders of the G20 seem to be battening down the hatches, rather than innovate with bold ideas to strengthen collective responses to the crisis.

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